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Cash Flow – The Most Important Control Your Business Will Ever Have

Posted on 12/06/2012, 09:28

Most business owners will be familiar with the phrase turnover is vanity, profit is sanity but cash is king’. It is unclear who the original author was but we all tend to acknowledge it as a truism. However, despite believing that this is right, statistically most business failures are due to cash flow problems.

More correctly, poor management coupled with bad cash controls lead to cash flow problems. The end result is not having enough money available to pay what must be paid at the time that it must be paid. From here it can be a short step to severe creditor issues and unpleasant subjects such as insolvency and administration. Most businesses can survive periods of making a loss but they can only run out of money once.

So what can a business owner do in order to avoid the nasty surprises associated with an absence of cash at a critical time? Below are several ideas and activities that should be implemented to give a business good cash controls and therefore problem free cash flow:


  • Own it. The business owner/Managing Director must take ownership of the financial functions and this includes the area of cash control. This is an attitudinal issue, delegation is fine but abdication is not. The survival and well being of your business is at stake, you must view it as a priority that forecasting systems, monitors and controls are in place that deliver a well managed finance function.
  • Be holistic. View financial and cash controls as an integral part of running a successful business. Take time to understand how the availability (or otherwise) of cash is both influenced by, and influences, the P&L, the marketing plans, the new product development schedules, the planned acquisition etc. The availability of cash gives you options; the absence limits your room for manoeuvre in all areas. A business can be viewed as a living organism with cash being its life blood.
  • Be proactive. Influence the future rather than just react to the present. Take control and manage your cash on a daily basis. Look three months ahead to avoid cash “speed bumps”. Exactly what cash is planned to come in and go out, and when will this happen? Reconcile the cash movements with your bank balance. It cannot be over emphasised: a cash flow forecast is essential for any business.  Being a forward looking tool the cash flow forecast is an immensely powerful driver of actions. The cash flow forecast will tell you if a scheduled sequence of transactions will breach your overdraft limit in five weeks time. You therefore have time to take the appropriate actions (be they financial, operational or sales) in order to avoid a cash crisis. ‘It will be alright on the night’ is not an acceptable approach to cash management.
  • Be firm with yourself. Avoid over trading. That big order may look enticing but before you accept it ensure that you can finance it. The cash flow forecast will assist in suggesting phased solutions or the scale of any funding requirement. Be prepared to go back and re-negotiate (or even decline) a potential order rather than destroy your business.
  • Make it easy for others to pay you. Huge amounts of time are spent dealing with queries and associated late-payments are often simply due to time lost sorting out errors on invoices.  Get your invoices right first time; send them to the right person at the right address, include all the relevant information, reference the correct purchase order number, make it clear when payment is due and use the agreed currency. Help customers to pay you and avoid time wasting invoice ping-pong.
  • Time is of the essence. Send out your invoices in a timely manner, do not wait until the end of the month to do them all in one batch.
  • Use technology. Electronic invoices and payments don’t get lost in the post. Do your customers and suppliers want a piece of paper or would they prefer the electronic transferring of information?
  • Be clear. Make sure that your Terms & Conditions of Sale are what you need for your business with title being retained until full payment is received.  Ensure that all customers receive and agree to your Terms & Conditions of Sale.
  • Are you a bank? If it essential to give credit to customers then put in place the mechanisms that financially protect you and avoid you financing everyone else’s business, for example:

a) Set credit limits, monitor and enforce them.

b) Credit check new clients and have a policy about when they can have any credit.

c) Be prepared to use the legal right to charge interest on late payers.

d) Maximise pre-payments and staged payments.

  • Have a routine. Hold a regular debtors meeting to review all outstanding invoices and put in place a routine for chasing them. Make it part of your normal modus operandi and not a special event.
  • Manage creditors. Pay what is due when it is due; know what payment schedules you are agreeing to at the time of taking on the commitment not afterwards. Early or late payments should happen for a reason.
  • Separate accounts. VAT and other routine payments can be alleviated by operating a separate deposit account. Feed cash into it every month and take it out when required.
  • Incentives can work. It may be appropriate to offer a discount for prompt payments so long as overall profitability can be maintained.
  • Strengthen internal controls. Be clear about who can make commitments, to what values, about spending your money and giving customers quotations. These define the amounts of cash that at some point in the future will come in or go out of your business.
  • Use less stuff. Cash can be tied up in stock and work in progress as well as debtors. Think lean and set some key performance indicators relevant to your business.
  • Talk to your suppliers. Your creditors need you as well as you need them. Seek win-win arrangements such as extended credit and discounts for repeat and regular business. Share your plans with them and change the relationship from buyer/seller to one of a partnership.
  • Don’t delay. Despite all of the above and even with good cash flow forecasting things can take a turn for the worse. Events do happen. Do not bury your head in the sand, be proactive and get on the telephone to your debtors, creditors and customers. The ‘sit back and hope’ approach to cash flow is a dangerous game. Changing scheduled deliveries and payments can radically improve your cash flow but only if everyone agrees. If you don’t ask, you won’t get. Be honest and do what you say you will do.
  • Banks are there to help! Make a friend of your Bank Manager and they will reciprocate.
  • Seek advice. The devil can be in the detail. Do not be afraid to get specialist advice. Cash flow can be improved, for example, by using factoring, invoice discounting or better asset management (e.g. lease or purchase plans) but are they appropriate and suitable for your business? Ask a man (or woman) who knows.

Remember that running a business is not just about doing things right, it is about doing the right things. Managing your cash flow is definitely the right thing to do.


John Grange

Business Improvement Specialist

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